Russia’s $160 Billion Stick Hinders Crimean Sanctions

An employee walks across the top of an oil storage tank at night in the custody transfer facility at the Salym Petroleum Development oil fields in Salym. Russia, the world’s largest oil producer, exported $160 billion worth of crude, fuels and gas-based industrial feedstocks to Europe and the U.S. in 2012. Photographer: Andrey Rudakov/Bloomberg

March 17 (Bloomberg) -- As U.S. and European officials
began imposing sanctions in their face-off with Russia over
Ukraine, Vladimir Putin’s $160 billion in oil and natural gas
exports may be his most potent weapon to limit punitive
measures.

The U.S. and its European allies have few levers to deter
Putin even as they warn Russia not to annex Crimea after a
referendum in Ukraine’s southern region yesterday. The European
Union today imposed travel-visa bans and assets freezes on 21
individuals and President Barack Obama issued an executive order
naming seven Russians for sanctions.

Russia, the world’s largest oil producer, exported $160
billion worth of crude, fuels and gas-based industrial
feedstocks to Europe and the U.S. in 2012. While shutting the
spigot on Russian energy exports would starve the Moscow
government of essential flows of foreign cash, the price may be
too high for European consumers and it may not alter Putin’s
plans, said Jeff Sahadeo, director of Carleton University’s
Institute of European, Russian and Eurasian Studies.

“In the short term, this would be very difficult to do and
it’s not clear it would even affect Russian behavior,” Sahadeo
said in a phone interview from Ottawa. If the West “puts down
the card of energy sanctions, it becomes a question of who
blinks first.”

Economic Pain

German Chancellor Angela Merkel, leader of the European
Union’s biggest economy, said last week her nation is prepared
to bear the economic pain that would accompany Russian
retaliation to any sanctions.

“If Russia continues to interfere in Ukraine, we stand
ready to impose new sanctions,” Obama said in a press
conference today.

Analysts from Goldman Sachs Group Inc., Bank of America
Corp. and Morgan Stanley said Europe probably won’t back
sanctions that limit flows of Russia’s oil and gas. European
members of the Paris-based International Energy Agency imported
32 percent of their raw crude oil, fuels and gas-based chemical
feedstocks from Russia in 2012.

Collectively, the EU, Turkey, Norway, Switzerland and the
Balkan countries got 30 percent of the natural gas they burned
from Russia last year, much of it pumped through pipelines that
cross Ukrainian territory, according to the U.S. Energy
Department in Washington.

Failed Attempt

Abstaining from Russian oil and gas would be “off the
table” for Europe, said Marc Lanthemann, Eurasia analyst with
Stratfor, a geopolitical intelligence company based in Austin,
Texas. Europe risks a replay of its failed attempt six years ago
to punish the Kremlin for going to war with the Republic of
Georgia, when it was unable to impose sanctions after
acknowledging its dependence on Russian energy.

While the ruble, Ukrainian hryvnia and other regional
currencies have tumbled as the conflict escalated, global oil
markets aren’t reacting to the potential for a sanctions-induced
supply disruption.

Brent crude futures traded in London, the benchmark for
more than half the world’s oil, traded at $107 a barrel today, a
decline from March 3, after Russia’s Parliament approved the use
of its military in Ukraine.

U.K. gas for next month, the EU’s benchmark contract traded
on ICE Futures Europe, fell 1 percent to 58.44 pence a therm at
2:57 p.m. London time, down from 61.70 pence on March 3.

‘Counterproductive Instrument’

Crimea, a dominion of Russia and then the Soviet Union for
more than two centuries before the Communist empire collapsed in
1991, voted yesterday to join Russia. The plebiscite was called
after a popular uprising forced Russian-backed President Viktor
Yanukovych to flee the Ukrainian capital of Kiev last month.

“Our partners understand that sanctions are a
counterproductive instrument,” Russian Foreign Minister Sergei
Lavrov told reporters after meeting with U.S. Secretary of State
John Kerry on March 14.

The U.S. and Europeans will likely disagree over any energy
sanctions and how much should be curtailed, said Seva Gunitsky,
an assistant professor at the University of Toronto’s Munk
School of Global Affairs.

Sanction Traction

“In order to get any traction with sanctions you have to
bring the EU in and I think that will be a difficult task
because of their dependence on Russian oil and gas resources,”
Gunitsky said.

The EU’s bill for Russian oil and gas amounted to $156.5
billion in 2012, 38 times what the U.S. spent for Russian
energy, according to the International Trade Centre’s Trade Map,
a venture sponsored by the World Trade Organization and the
United Nations.

Sanctions that crimp the lifestyles of Putin’s billionaire
friends, such as visa restrictions and bank account freezes,
might “be more effective and easier for Europe to stomach than
sanctions on Russian gas,” Gunitsky said.

And energy sanctions may backfire if cutting off Russian
shipments raises prices and triggers a backlash from angry
European consumers.

“The sanctions might hurt the current customers of Russia
at least as much as they hurt Russia,” said Judith Dwarkin,
chief energy economist at ITG Investment Research in Calgary.
“It’s a double bind. The European market is very important for
Russia and Russia is very important for the European market.”